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The problem in the Eurozone was not indiscipline in the public sector – it was indiscipline in the private sector, which lent and borrowed at spreads to national interest rates. In Spain, non-government debt rose from 80% to 270% of GDP. In Germany where there was least impact on interest rates, German private-sector debt as a percentage of GDP hardly budged in comparison. The European credit crisis relates more to Hyman Minsky’s ‘Financial Instability Hypothesis’ than to the ‘it was the Greeks’ fault!’ school of thought of some politicians (see Minsky 1992).

Excessive, debt-financed private consumption in one country relative to another will be reflected in, but is not caused by, national current-account positions. And just as in emerging-market crises of old, when there was a loss of confidence in the asset values underpinning private borrowing, there was a sudden stop of the private flows that were financing these current-account positions.